Wells Fargo (WFC) had to make some tough decisions to stay on track with its turnaround plan. It’s one of three industry developments impacting Wells and our other banking name, Morgan Stanley (MS). Wells Fargo said this week that more layoffs are coming in 2024 as the bank doubles down on efficiency and cost cuts. Elsewhere, Morgan Stanley’s asset management division has raised more than $1 billion for growth investments, the Wall Street Journal reported Thursday. This is the latest sign that its long-dormant deal-making business could be showing signs of life again. At the same time, the banking industry faces new regulations that could reduce profits for both companies. Banks are grappling with decades of high interest rates and higher funding costs as economic uncertainty grips the sector. The KBW Bank Index, which tracks the performance of the largest U.S. bank stocks, is down 13.85% year-to-date, compared to the S&P 500’s 19.91% gains since the start of 2023. While Jim Cramer recently described this, Although he While classifying the sector as a laggard on the stock market, he believes shares of both companies are still a buy. At Morgan Stanley in particular, Jim said stocks should be bought “aggressively” because of their high dividend yield and cheap valuation. However, recent headlines provide insight into how our financial stocks are faring in a challenging business environment. Cost Cutting The News: During a Goldman Sachs conference on Tuesday, Wells Fargo CEO Charlie Scharf warned of high severance costs for the bank’s fourth quarter. “We’re expecting a severance payment of about $750 to a little less than $1 billion in the fourth quarter, which we weren’t expecting just because we want to continue to focus on efficiency,” Scharf said. He added that the company needs to be more “aggressive” in managing people and is “not yet anywhere near” where it should be in terms of efficiency. Wells Fargo has already laid off more than 227,000 employees this year (as of September) – about 4.7% of its workforce. The CEO also noted that the bank wants to continue to allocate funds to expand the profitable areas of its business, such as capital markets. The Club’s Take: While layoffs are never an easy decision, management’s focus on cost cutting is necessary to improve Wells Fargo’s efficiency ratio – a measure of the bank’s expenses relative to its revenue. Wells Fargo’s efficiency ratio has steadily improved in recent years, supported by various initiatives such as the significant reduction in US mortgage business. Overall, Wells Fargo is a multi-year project for the club as the bank continues to make further progress on its turnaround plan, which was implemented after financial regulators imposed a $1.95 trillion asset cap on the bank in 2018. However, we maintain that lifting the cap is a “when, not if” scenario – one that should increase the bank’s balance sheet and allow the company to reap more profits. WFC YTD Mountain Wells Fargo year-to-date performance. Fundraising The news: Morgan Stanley Investment Management has raised nearly $1.2 billion in funding for late-stage growth investments, news the bank confirmed after The Journal originally published the story. The bank’s asset management division closed two different private equity vehicles, exceeding its fundraising target by about 40%, the bank said. The Club’s Take: While the investment may seem like a drop in the bucket for one of the country’s largest banks – it manages around $1.4 trillion in assets – the move signals a more positive development for the broader fundraising environment . Raising capital has become significantly more difficult since the Federal Reserve began raising interest rates in March 2022 and SVB went bankrupt earlier this year. Therefore, any sign of a pick-up in investment could have a positive impact on the overall business environment. That would benefit Morgan Stanley’s struggling investment banking business, which has slowed in recent quarters due to a subdued initial public offering market and weak merger and acquisition activity. MS YTD Berg Morgan Stanley performance since the beginning of the year. Regulation The News: On Wednesday, the heads of eight of the largest U.S. banks, including Wells Fargo and Morgan Stanley, tried to convince lawmakers that the proposed regulations, known as the Basel 3 endgame, would not only benefit their companies but also the would harm ordinary Americans. During an annual Senate oversight hearing, CEOs rejected new proposed rules aimed at U.S. banks with at least $100 billion in assets that would increase the amount of capital firms must hold to mitigate future risks. “The rule would have predictable and damaging consequences for the economy, markets, businesses of all sizes and American households,” said JPMorgan CEO Jamie Dimon. The Club’s View: We are optimistic that Wells Fargo and Morgan Stanley will be able to adapt to any new rules as both are well capitalized, as the Federal Reserve’s annual stress tests showed earlier this year. Although the Basel 3 endgame could hurt Morgan Stanley’s net interest income, any weakness should be offset by a more profitable investment banking division. Additionally, Morgan Stanley’s outgoing CEO James Gorman told CNBC last month that the bank can handle “any form” of new rules that regulators may implement. (Jim Cramer’s Charitable Trust is called WFC, MS. 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A combination photo shows Wells Fargo, Citibank, Morgan Stanley, JPMorgan Chase, Bank of America and Goldman Sachs.
Reuters
Wells Fargo (WFC) had to make some tough decisions to stay on track with its turnaround plan. It is one of three industry developments impacting Wells and our other banking names: Morgan Stanley (MS).